LONDON (REUTERS) - Gold slipped on Wednesday as a stronger dollar prompted a flurry of sales, but investor buying sparked by sovereign debt concerns and inflationary pressures. Spot gold was bid at $1,518.29 a troy ounce at 0905 GMT (5:05 a.m. ET) from $1,523.25 an ounce late in New York on Tuesday. The precious metal hit a three-week low of $1,511.11 on Monday. The dollar rose against the euro, which succumbed to worries about the Greek debt crisis after euro zone ministers failed to agree a deal. "Euro zone -- and perhaps soon U.S. -- sovereign debt concerns remain critical, there is a lot of liquidity still and China's growing middle class can't get enough of the yellow metal," said David Thurtell, analyst at Citi. "Investors want to avoid the dollar, euro and yen. It doesn't leave much, especially if you can't access the yuan." The United States could lose its top-notch credit rating and the dollar's reserve-currency status could suffer if the Republicans and Democrats do not agree a deal to cut the deficit. The deal should give Congress the political cover to raise the $14.3 trillion debt limit well before August 2, when the Treasury Department has warned it will run out of money to pay the government's bills. "Even a short suspension of payments on principal or interest on the Treasury's debt obligations could cause severe disruptions in financial markets and the payments system," Federal Reserve Chairman Ben Bernanke said. RESILIENT PHYSICAL DEMAND A higher dollar makes commodities priced in dollars more expensive for holders of other currencies, while gold is used to protect investment portfolios the value of which can be severely eroded by inflation. Raising concern this week was inflation data from China and India, two of the world's fastest growing economies, which showed accelerating price pressures. "Chinese and Indian inflation is underpinning what has been resilient physical metal demand so far this year," said Daniel Major, analyst at RBS, "Currencies will be important." Investor interest in gold should eventually show up in holdings of physically backed exchange-traded funds of which the largest is New York's SPDR Gold Trust. SPDR's holdings were unchanged on Tuesday from Monday, while those of the largest silver-backed ETF, New York's iShares Silver Trust fell 0.44 percent. Spot silver was bid at $35.10 an ounce from $35.32 late on Tuesday. The precious industrial metal hit a record high of $49.51 on April 28. "Investors have generally been prepared to trade (silver) this year only because they believed the upside potential to be large," UBS said in a note. "Earlier this year the potential for a 30 percent rise in silver appeared greater than the potential for a 30 percent fall. Now, however, a 10 percent downside correction now looks more likely that a 10 percent rebound." Spot platinum was bid at $1,783.74 an ounce from $1,789.20 late in New York On Tuesday and palladium at $783.47 from $790.20 an ounce. (Reporting by Pratima Desai; editing by Alison Birrane)

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